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India launches new bank to fund the unfunded
April 12, 2015, 10:20 am

The Indian government came through on its budget proposal to establish MUDRA Bank, with its launch on 8 April by Prime Minister Narendra Modi. The plan to set up the bank, which is an acronym for Micro Units Development and Refinance Agency, was first announced in the Union Budget in February.

Speaking on the occasion the Prime Minister said the government's priority is to provide employment and in this regard it was important to encourage self-employment and small and medium enterprises. The Prime Minister noted that the aim of MUDRA bank is to provide financial assistance to the "unfunded" small entrepreneurs who provide employment to a large number of people.

The scheme, which has a corpus of Rs200 billion, can lend between Rs50,000 and Rs1 million to small entrepreneurs. "Through MUDRA Bank our target and focus is on 57.5 million who use funds of Rs11 trillion, with an average per unit debt of merely Rs17,000," the PM said. He added that a loan benefit of Rs100,000 to these entrepreneurs will provide a big push to the country's gross domestic production (GDP).

Pointing out that MUDRA Bank will help instill a new confidence in the small entrepreneurs who have so far been exploited by money lenders, the PM noted that large business houses, which attract a lot of media attention, provide employment to only 12.5 million people. Small entrepreneurs employ 120 million people and these borrowers repay loans promptly, he said, stressing that "saving is a habit in India and there is a need to give a push to this traditional strength".

Growth in small businesses is key for the Indian economy because the sector is estimated to account for 20 percent of economic output and 40 percent of India's exports. Despite this huge contribution to the country’s economy, just four percent of 58 million small business units in the country have access to bank loans  and have to rely on informal lenders for credit.

The MUDRA Bank will provide loans to small businesses and entrepreneurs can get credit of up to Rs1million for small business units. These loans will help bridge the estimated Rs80 billion shortfall in loans for small businesses.

Providing access to institutional finance to such micro and small business units and enterprises is not only expected to improve the quality of life of these entrepreneurs, but also turn them into strong instruments of growth and employment generation. In a few years, banks will queue up to lend to these entrepreneurs, the PM said.

The Mudra Bank will also regulate micro-finance institutions and formulate their lending norms so as to promote their growth and add to the country's output and create jobs. The PM asked bankers to study the successful microfinance models being followed in other parts of the world and try to adapt them according to the local requirements.

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